Retirement income for the masses: A new covenant wrapped in an old conundrum

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By Jeff Gebler | 27 June 2018

The needs of workers saving for retirement are relatively simple: generate the highest long-term investment returns within certain tolerances for risk. The needs of retirees are incredibly complex: generate the highest lifetime income possible with both certainty and flexibility.

This is the riddle of the retirement super system. Yet super fund trustees will soon need to balance these competing objectives thanks to a proposed Retirement Income Covenant, which will codify their requirements and obligations to improve retirement outcomes for members.

The challenge centres around Comprehensive Income Products for Retirement (CIPRs) – the key delivery mechanism for this set of pledges. Trustees will need to understand and engage with their members like never before if they are to have any chance of delivering on their promises.

The dangers of one-size-fits-all

Funds must take care in constructing a retirement income strategy, especially one that focusses on the “collective needs of members” as described in the covenant position paper. There is no such thing as a default retiree, and designing an income strategy for the average member may fail to cater for the collective whole.

Yet trustees will need to offer a “flagship” CIPR (a standalone account-based pension would not qualify) that provides broadly constant income for life (not expected lifespan) while maintaining some access to capital.

These goals–managing longevity risk management while maintaining some access to capital –stand in fundamental opposition. Longevity pooling requires giving up access to capital and vice versa.

It is quite possible that there is no clear single retirement income strategy to apply to the majority of a fund’s membership, even though a minority may clearly benefit from a particular strategy.

Trustees have some flexibility to offer up to three flagship CIPRs based on an individual’s account balance (without the offer constituting financial advice), which will allow tailoring based on their likely access to the Age Pension (full, part or ineligible).

Members on the full Age Pension may benefit from a CIPR’s extra income but have little need for longevity protection given the government guarantees Age Pension payments until death. However, wealthier members who are ineligible for the Age Pension may need both extra income and longevity protection.

However, this is just the start of questions trustees should be asking.

Unmasking the financial position and preferences of members

The line between general and personal advice is a fine one that can’t be breached. Yet the complex nature of retirement requires trustees to know more about their members if they are to make collective decisions on their behalf.

Individual super balances are just one factor underpinning a quality retirement. Other factors that funds are not generally privy to include whether members own their own home or rent; have substantial savings and assets outside of super; or are part of a couple where the spouse has accumulated the bulk of super savings and assets.

These are major issues for trustees to overcome or many members may end up in inappropriate products that worsen retirement lifestyles rather than improving them.

One mitigating factor is that members will still need to explicitly accept a fund’s CIPR offer. However, each fund’s CIPR will still need to attract enough members to achieve scale. For example, longevity pools may require a minimum of 1,000 lives. Men and women also have material differences in expected lifespan, raising issues about equitable longevity protection.

Big data can help funds fill in the gap between personal and general advice–a crucial bridge for trustees if they are to construct CIPRs that fulfil such multifaceted purposes for members with disparate needs.

The Milliman Retirement Expectations and Spending Profiles (ESP), which analyses the bank transaction data of more than 300,000 Australian retirees, is revealing how. It is changing many long-held beliefs and assumptions and bringing communication, advice and product design closer to the reality of retirement.

For example, this real-world data shows that the median retired couple’s expenditure falls by more than one-third as they move from early retirement (65 to 69 years of age) to older age (85 years and beyond). This occurs across all wealth levels. Yet CIPRs are required to produce income that is “broadly constant” (trustees decide whether in real or nominal terms and whether to incorporate the Age Pension) across time.

The Milliman ESP analysis runs deeper and allows member profiles to be created based on a wide range of data such as discretionary versus essential expenditure, location and lifestyle preferences. In this way, funds can use members’ known data, such as postcode and income, to assign probabilities about other key factors such as home ownership and future behaviour.

A higher engagement requirement should prompt funds to consider the level of their advice

Funds won’t be required to provide licensed financial advice under the Retirement Covenant. However, they will need to provide guidance or intra-fund advice tools to help members choose between retirement income products.

While this may be relatively simple for funds offering one CIPR and an account-based pension, many other funds will strive for more. More thorough advice is a natural step given the covenant also calls for trustees to engage with members about retirement throughout their lifetime and to obtain consent before rolling a member into a CIPR.

The Productivity Commission also called for better (not more) information and advice to boost meaningful engagement in its recent report into super competition. It conducted a ‘choice’ experiment and found that members are much more willing to pay for forms of contact that allow for personalised assistance such as online chats rather than newsletters and seminars.

While some large funds already offer personal and intra-fund advice, this is often not scalable across a massive membership base, limiting its relevance to default-like CIPRs. One possibility is for funds to consider ramping up their investment in ‘advice-like’ technology.

This advice requires robust tech that needs to be:

  • Repeatable. Similar members should receive similar guidance. Calculations need to be audited and able to be repeated.
  • Scalable and responsive.
  • Intuitive. Explains industry concepts such as longevity risk and sequencing risk to the layperson.
  • Relatable. Members need to see themselves in projections and forecasts built on real-world spending needs and behaviour.

Milliman has used its decades of actuarial experience as well as its proprietary ESP data to build a goals-based advice platform that is able to perform complex stochastic modelling previously only seen at large institutions.

This can extend the reach of advice and improve its quality by taking into account important factors, such as assets outside of super/pension, the wealth of a spouse and health status, that are not directly observable by funds.

Whether general or personal, advice should rely on the same underlying platform and be delivered in the form that members demand.

These are the major challenges facing trustees as they begin grappling with the government’s proposed Retirement Income Covenant. Getting it right means members will receive the comfortable retirement they deserve.

To discuss how your super fund can adapt to the proposed retirement income covenant, contact Milliman senior consultant Jeff Gebler at for more details.


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